A list of some of the most commonly used terms in Commercial Real Estate

1031 exchange – An IRS 1031 exchange is an allowed practice under the Internal Revenue Service regulations that allows an owner of certain types of properties to exchange them for others and defer some or all of the related capital gains tax. Note a qualified intermediary is required in a 1031 exchange.

Absorption Rate – the amount of units inventory of a commercial property type that become occupied during a specific time (usually a year).

Agency agreement – an agreement between an agent and a buyer or seller. Examples include: listing agreement, Buyer/broker agreement and dual agency agreements.

Air Rights – The rights to use the air space over a piece of property.

ADA – see Americans with Disabilities Act

Americans with Disabilities Act (ADA) – A civil rights law that was passed to prohibit discrimination against persons with disabilities.

Anchor Tenant – A tenant of a shopping center or industrial development that has leased a large space sometimes called a “destination” tenant, usually these tenants lease at least 25,000 SF. An example in a neighborhood shopping center anchor tenant may be a grocery store.

Base Rent – The minimum rent due the landlord. Typically a fixed amount, excluding pass-through charges, percentage rents and other additional charges. Escalations are calculated from the annual base rate.

Big Box – a term frequently used for large square footage tenants like Walmart, a grocery store, department store or a Home Depot.

Building Code – Local, state or regional ordinances that specifies the method and materials to be used in constructing improvements.

Capitalization Rate (CAP Rate) – The rate of return investors are receiving on similar investments.

Cash flow – The cash an owner has left after paying operational expenses and debt service (payment on the note).

Cash on Cash – Refers to cash on cash return, the annual cash return compared to the value of the real estate.

Certificate of occupancy – A document issued by an appropriate goverment agency certifying that the premises comply with local building codes and/or zoning ordinances.

Class A office building – A classification used to describe commercial buildings that are considered as extremely desirable investment-grade properties and command the highest rents and sales prices compared to other commercial buildings in the same market. A class a office building would typically contain a modern mechanical system, and have above average maintenance and management as well as the best quality materials and workmanship in their trim and interior fittings.

Class B office building – A Classification used to describe office buildings that qualify as a more speculative investment, ans as such command lower rents or sale prices compared to class A office building. A class b office building typically have average to good maintenance, management and tenants. They lack prestige and must depend on a lower price to attract tenants and investors.

Class C office building – A classification used to describe office buildings that generally qualify as no-frills, older office buildings that offer basic space and command lower rents and sale prices compared to other office buildings in the same market. These office buildings typically have below-average maintenance and management, and could have mixed or low tenant prestige, inferior elevators, and or mechanical/electrical systems. These office buildings lack prestige and must depend on a lower price to attract tenants and investors.

Clear Height – The area between the floor and the ceiling that is unobstructed by lights, air conditioning ducts, etc. Some tenants (particulariy industrial buildings) need a minimum clear hieght to operate their equipment.

CAM – See Common area maintenance.

Common Area Maintenance (CAM) – An expense that can include a variety of property expenses. Typically expenses such as utilities, maintenance, parking lot cleaning, management fee and landscaping expense.

Community Shopping Center – A shopping center that has a trade area of usually between 5 miles up to 20 miles, depending on the other competition. These centers typically have a total square footage between 100,000 and 350,000 SF and will generally have 2-3 large anchored tenants. Common anchors are supermarkets and super drugstores and sometimes contain tenants such as apparel, home furnishings, toys, electronics or sporting goods.

Deed of Trust – A type of mortgage arrangement where the lender holds legal title and the borrower hold equitable title.

Deed restrictions – must be investigated during the due diligence period are restrictions placed on a property by the seller via a deed.

Demographic reports – Show census information of an area. Typically the number or households, ages, income etc.

Dual agency agreement – an agreement where the real estate firm represents both the buyer and the seller or both the landlord and the tenant.

Due Diligence – The process of investigating all the issues that effect the property such as zoning, soil tests, feasibility studies, tenant interests etc.

Easement – the right to use another’s property for a stated purpose. An easement may be granted by a deed or created as a result of actual use that was not prohibited (easement by prescription).

Egress – The act of going out, especially from an enclosed place. In shopping centers, this is a critical parking issue for traffic flow. See also Ingress

Employment base – the number and type of potential employees in an area.

Encrochment – The trespass of an improvement.

End user – The occupant of the space.

Estoppel Certificate – A ratification of the tenant’s lease by the tenant(s) that must be investigated by the buyer during the due diligence period. Requested by the landlord when selling or refinancing the property to prove the validity of the lease.

Exclusive use provision – A clause preventing the landlord fo a commercial building from leasing space to other tenants whow sell merchandise or provide a service similar to that specified in the tenants lease.

Expense Stop – Used in leasing to define the limit the tenant or landlord will pay toward an expense.

Flex Building – A building designed to be used in a combination of office, research and development, sales and part of building used for industrial, warehouse, and or distributions uses. A typical flex building will have at least half of the rentable area being used as office space.

Full Service Lease – A lease that usually provides full services such as janitorial and utilities, always confirm what expenses are included.

Gray shell – Used in refering to the condition of the interior of a retailshell space that has been partially improved by the landlord ( stubbed plumbing has been installed and concrete floors have been poured, but there is no finish on demising walls). compare to vanilla shell.

Gross Lease – A very broad term where the landlord paying the operating expenses read carefully to determine who is paying what expenses.

Industrial building – A type of building used for uses such as assembling, processing, warehousing and or manufacturing

Industrial Flex – see Flex Building

Ingress – The act of going in or entering. In shopping centers, this is a critical parking issue for traffic flow. See also Egress

Insurance provision – a provision in commercial leases that requires the tenant to obtain specified types and amounts of insurance, including a certain amount of liability insurance, and to include the building owner as an additional named insured party on the policy.

Letter of Intent ( LOI ) – Used in the early stages of negotiation, is a non-binding outline of the terms of the agreement to aid in the drafting of the agreement.

Load Factor – The percentage of space in a commercial building that is added to its usable area to account for lobbies, corridors and other common areas; calculated by dividing the building’s total common area by it’s total usable area.

Neighborhood Center – Provides for the sales of convenience goods( food, drugs etc..) and personal services for day-to-day living needs of the immediate neighborhood with a supermarket being the primary tenant.

Net Lease – Where some or all of the rent is “net” of expenses to the landlord. Carefully review.

Net operating income (NOI) – income minus operating expenses.

NOI – see Net operating income.

Office Building – a type of a commercial building used primarily for office use ( sales, financial etc..) as opposed to manufacturing, warehousing or other uses

Power Center – The center typically consists of several freestanding anchors and a minimal amount of small specialty tenants. A Power Center is dominated by several large anchors, including discount department stores, off-price stores, warehouse clubs etc.

Qualified intermediary – The party who holds the money or property in a 1031 exchange.

REIT – see Real estate investment trusts.

Real Estate Investment Trusts (REIT) – A portfolio of investment real estate structured in a trust. Shares are sold and distributions made depending on the REIT’s profitability.

Rentable square footage – the area the tenant is being charged rent on. In office buildings this often includes a load factor. A load factor is a markup over usable space to reflect the common areas of the building.

Strip Center – A strip center is an attached row of retail stores or service outlets managed as a coherent retail entity, with on-site parking usually in the front of the stores.

Tenant improvement (TI) allowance – In commercial leasing, an amount a landlord agrees to spend (for office and industrial buildings) or grants to the tenant (in retail properties) to improve the leased space before the tenant move in or as a condition of the lease renewal. The exact amount, if any is negotiable. Payment for tenant improvements si part of the lease negotiations.

Triple Net Lease ( NNN) – A Type of lease where the tenant pays some of the expenses in addition to the rent. In many areas including the valley the NNN part refers to common area maintenance (CAM), real estate taxes and insurance. Always confirm.

Turnkey operation – A concession where the owner agrees to provide a completely finished space for the commercial tenant.

Use provision – A lease provision that restricts the use of the rntal space. In an office or industrial lease, the type of business operation or intended use is cited. In a retail lease, the use provision resticts the tenant’s use of the rented space by indicateing what types of goods can and cannot be sold.

Vanilla shell – Used in referring to the condition of the interior of a retail shell space that has been partially improved by the landlord. The improvements include only the drop ceiling, demising walls ready for paint, finished handicapped-accessible washrooms (an ADA requirment), floor covering, water heater, na basic electrical outlets. compare gray shell.

Zoning – Local ordinances that must be investigated during the due diligence period,that dictate the uses allowed on the property in the jurisdiction the property is located.